Pound jumps against Singdollar; further strength likely but not at same pace

Singapore

AS EXPECTED, sterling rallied strongly against the Singapore dollar as it did with the greenback following the huge Conservative victory in the UK general election on Thursday.

The pound jumped over 2 per cent to 1.82 against the SGD, in line with a similar surge to 1.35 over the USD on Friday.

Sterling is expected to continue advancing but not at the same pace given Friday's big jump, which had priced in a majority win for the Conservative Party, say currency strategists.

The pound is now almost 10 per cent higher against the SGD since this year's low of 1.66 in July/August.

"It's a big move," said United Overseas Bank (UOB) FX strategist Peter Chia.

While further strength in GBP/SGD is likely, it is unlikely to maintain its current pace of advance and 1.8815 could be out of reach within the next couple of months, he said.

"Investors with needs for GBP may look for strong support near 1.7700 to buy into."

Last week, UOB had said "the risk is for further GBP/SGD strength" and "a move above the March 2019 high of 1.8095 is not ruled out, but the next resistance at 1.8307 is likely out of reach".

The view was supposed to take a few months to evolve but in a span of about a week, GBP/SGD surged to within a few pips of 1.8307 (the GBP/SGD hit a high of 1.8296 early Friday morning).

"The strong and impulsive momentum suggests 1.8307 may not be able to check the advance in GBP/SGD.

"That said, if and by when GBP/SGD reaches the 2018 peak of 1.8815, it would have reached deep overbought territory," UOB said in an updated note on Friday.

"On a shorter-term note, 1.8550 is already a strong resistance. On the downside, 1.7700 is acting as a solid support."

DBS Bank FX strategist Philip Wee said the pound is not a one-way bet up because of the country's weak economic fundamentals and a lot of still uncertain factors.

"It's unlikely to sustain much higher because of weak growth," said Mr Wee. DBS had previously forecast that the pound would advance to 1.79 against the SGD and move gradually to 1.83 by end of next year.

"As we head into the next year, a return to reality could limit gains, given the challenges surrounding a trade deal negotiation between the UK and the EU," said Eli Lee, Bank of Singapore head of investment strategy.

While expectations are now for a Brexit on Jan 31, Brexit is far from over as the UK will have to negotiate a trade agreement with the European Union. This is the transition period during which it will negotiate a new relationship with the remaining 27 EU states.

This can run until the end of December 2022 under the current rules, but the Conservatives made an election promise not to extend the transition period beyond the end of 2020. "Realistically, trade talks take years," said Mr Wee.

Another uncertainty is whether the Bank of England (BOE), which has not cut interest rates since November 2017, will now do so given the country's weak economy. "The bias is still to cut," said Mr Wee.

BOE governor Mark Carney - who has twice extended his term - is stepping down end of next month with no news yet of his replacement, Mr Wee also noted.

In the meantime, what should pound investors do? "With a GBP/USD forecast at 1.38 over 12 months and a USD/SGD forecast at 1.34 over the same time period, the pound is expected to outperform the SGD, said Dominic Schnider, UBS head commodities & head Asia pacific forex/macro.

In that context and on the back of a cheap GBP/USD valuation (fair value at 1.56) as well as limited SGD nominal effective exchange rate appreciation potential, SGD based investors are advised to stick to their GBP longs, he said.

"We also advise investors not to hedge their UK assets due to the cheap valuation of the currency - normally we would hedge such positions. "In short, if a SGD based investor is in need of GBP, he/she should hurry up and get his pounds before Christmas," he added.

Julian Wee, Credit Suisse investment strategist, Asia Pacific, said: "With the decisive Conservative Party win in the latest election, uncertainty over Brexit is likely to fall for the time being as the new government will likely be able to pass PM Johnson's Brexit deal and remove risk of a no-deal Brexit. "This should at least support the GBP/USD around current levels of 1.35 with the potential to move to 1.40 in 12 months.

For the USD/SGD, we continue to see it 1.3650 and 1.3700 in three and 12 months respectively, in large part on account of the USD/CNY moving lower in the near term before rising again later in 2020. This would imply a slight rise in the GBP/SGD to 1.84 in three months and 1.92 in 12 months."

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